Aon plc — Q2 2013 Form 10-Q Summary
Business context and reporting period
Aon plc provides risk brokerage and advisory services through Risk Solutions, and human-capital, benefits and related services through HR Solutions. This unaudited filing covers the quarter and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods unless noted. Amounts are in U.S. dollars.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $2.897bn | $2.821bn | $5.812bn | $5.662bn |
| Operating income | $382m | $394m | $792m | $796m |
| Operating margin, reported | 13.2% | 14.0% | 13.6% | 14.1% |
| Net income attributable to Aon shareholders | $241m | $246m | $502m | $484m |
| Diluted EPS from continuing operations | $0.76 | $0.73 | $1.58 | $1.44 |
| Adjusted diluted EPS, non-GAAP | $1.11 | $1.02 | $2.23 | $1.99 |
- Revenue increased 3% in both the quarter and first half. Organic growth was 3% in Risk Solutions and 2% in HR Solutions for Q2; for the first half, it was 3% and 1%, respectively.
- Reported operating income slipped in both comparison periods, despite revenue growth. Adjusted operating margin, a non-GAAP measure, was 18.5% for Q2 and the first half, versus 18.6% in each 2012 period.
- Risk Solutions Q2 revenue rose 2% to $1.944bn and operating income increased to $391m from $384m. HR Solutions revenue rose 3% to $956m, but operating income fell to $36m from $58m.
- Operating cash flow for the first half was $387m, versus $269m. Capital expenditures were $122m; free cash flow, as defined by Aon (operating cash flow less capital expenditures), was $265m versus $140m.
Balance sheet, debt and liquidity
- At June 30, 2013, cash and cash equivalents were $266m, short-term investments $307m, total debt approximately $4.4bn, and shareholders’ equity $7.6bn. Debt was 37.0% of total capital attributable to Aon shareholders, compared with 34.9% at year-end 2012.
- Cash and short-term investments totaled $573m, of which $201m was restricted. Fiduciary assets of $12.576bn were matched by fiduciary liabilities and are not available for general corporate use.
- Aon reported $1.2bn of working capital and said all of its approximately $1.2bn in committed credit facilities was available at quarter-end. The company said operating cash flows and credit availability should meet foreseeable liquidity needs.
- First-half financing included $525m of share repurchases and $105m of shareholder dividends. Debt issuance less repayments was $307m. Aon repurchased 8.5m shares during the first half; $3.5bn remained authorized under its repurchase program.
Changes, outlook and notable items
- Q2 revenue growth was partly offset by lower fiduciary investment income. Management cited economic weakness in continental Europe and unfavorable reinsurance market conditions, alongside HR benefits-administration price compression and weaker discretionary demand for international retirement consulting.
- Reported margins were pressured by higher restructuring costs, investment in growth opportunities and an unfavorable HR Solutions revenue mix. HR Solutions also faced legacy litigation-related expenses and timing of costs. Q2 operating expenses included $29m of additional errors-and-omissions charges and $20m of legacy claims-handling costs, partly offset by a $43.5m favorable settlement of a one-time legal matter.
- The Aon Hewitt restructuring plan is expected to cost approximately $411m in total, up $86m from the previously disclosed estimate; $334m had been incurred and about 2,420 of approximately 2,900 planned job eliminations completed by June 30. Aon expected approximately $327m of annual savings in 2013 and $378m cumulative savings by the end of 2014; actual costs and savings may vary.
- Management expected a 2013 effective tax rate of approximately 26%, subject to discrete tax adjustments and geographic income mix. It expected debt to remain around historical/current levels and commercial-paper use to continue at levels similar to Q2. The company planned about $257m of additional pension contributions in the rest of 2013.
- Risk factors include soft insurance pricing and competition, global economic conditions, foreign-exchange and interest-rate movements, pension funding, credit ratings and access to borrowing, litigation and errors-and-omissions claims, regulatory requirements, and execution of restructuring and Hewitt integration. Aon noted that several substantial legal claims were not estimable; management did not expect the matters disclosed to materially affect consolidated financial position, but an unfavorable resolution could materially affect a particular period’s results or cash flows.
- Other notable items: foreign-currency translation reduced first-half other comprehensive income by $232m; goodwill declined to $8.795bn, mainly from currency translation. Aon issued $250m of 4.45% notes due 2043 and repaid $306m of a term loan due October 2013. In July 2013, after quarter-end, Aon Holdings LLC transferred its ownership of Aon Corporation to Aon plc.
Key facts for investors to verify
- Whether organic growth, particularly in HR Solutions and reinsurance, continues amid the market and demand headwinds described.
- Whether HR Solutions’ operating performance recovers, and how restructuring charges, savings and remaining implementation costs develop.
- How much of reported cash and short-term investments is unrestricted and available, given fiduciary funds and other restricted balances.
- Debt levels, commercial-paper reliance, credit-facility covenant compliance and credit-rating outlooks; Aon reported compliance with covenants at June 30.
- Developments in material litigation and errors-and-omissions matters, including outcomes or accruals not estimable in this filing.
- Whether the expected 2013 tax rate, pension contributions and restructuring savings are realized. The filing states interim results are not necessarily indicative of full-year results.